TANSTAAFL, There Ain't No Such Thing as a Free Lunch

By David R. Henderson

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“When you start thinking about the value of your time, you realize that some activities that seem cheap are actually expensive.”

At the start of every class I teach, I give my students what I call “The Ten Pillars of Economic Wisdom.” These pillars, I tell them, are the basis for a huge percent of economic analysis and if they master them, they will have accomplished a lot. None of the pillars, of course, is original with me. What is original is my choice of these ten, as well as the way I state some of them.

Pillar #1 is “TANSTAAFL.” It stands for “There Ain’t No Such Thing As a Free Lunch.” Science fiction writer Robert Heinlein popularized the acronym in his novel The Moon is a Harsh Mistress. Of course, to be grammatically correct, it should be “TINSTAAFL”: There Is No Such Thing as a Free Lunch.” What follows is my exposition and application of this simple, but profound, insight.

There are two meanings of the expression. One is always true, while the other is usually true.

Scarcity and Tradeoffs

First, let’s consider the meaning that’s always true: Economic resources are scarce, and, therefore, if we get more of one, there has to be less of another. What are economic resources? It’s a little circular: economic resources are defined as scarce resources. So the statement is tautological. But let’s put content into it. What is a scarce resource? You could count the pineapples in Hawaii, the Mercedes Benzes in Beverly Hills, and the steel in South Korea, and you still wouldn’t know whether they are scarce. Here’s how you would know: At a zero price (and not a price set at zero by government regulation or caused to be zero by a government subsidy), is there enough of the good to satisfy everyone’s demands? If not, the good is scarce.

This means that the vast majority of goods are scarce. There are a few non-scarce goods, which economists call “free goods.” Air is a free good in most situations. Clean air is sometimes a free good. Water is a free good in many situations. It is clearly a free good on the ocean. However, when you’re on the ocean, salt-free water is not a free good.

The fact that the vast majority of goods are scarce, not free, leads directly to tradeoffs. If we want more of something, we have to give up some of something else. If you want more leisure time, you have to give up some income. If you want the latest, biggest flat-screen television set, then you would have to give up spending the money on something else or you would have to save less. There are always tradeoffs.

Everyone faces those tradeoffs. One fairly well-to-do family I knew in the 1990s, unsatisfied with the government-run elementary and high schools, sent their daughter to an expensive private school, knowing that that meant giving up the idea of vacationing in Europe.

What about the richest people in the United States? Do they face tradeoffs? Yes, they do. We can point to the standard tradeoffs with spending: if Bill Gates spends one billion dollars on trying to improve schools in the United States, that’s one billion dollars that he can’t spend on helping people in Africa. You might point out that the Bill and Melinda Gates Foundation, that he and his wife formed, does both. But the point is that, starting from a given amount they want to spend, if they spend more on one cause, they have less to spend on another.

But there’s another way that Bill Gates faces tradeoffs every day, the same kind of tradeoffs that you and I face: his use of time. He has the same 24 hours in a day that all of us have. If he spends an hour reading about the web, that’s time he can’t spend playing with his kids. Time, in short, is a scarce resource. Indeed, I tell my students that it is probably the scarcest resource they have.

When you start thinking about the value of your time, you realize that some activities that seem cheap are actually expensive. For example, if I want to get from Monterey to San Diego, I could drive but that would take me about 7 hours—and that’s if the traffic in Los Angeles is uncongested, as it rarely is. But if I fly direct, I’m there in just over 2 hours, including the time I spend waiting in the airport. The scarcity of my time makes driving very expensive.

One of my students, in an essay on what she learned from my class, had the same insight. She wrote:

When I first moved to Monterey, I knew I would want to visit my friends down in San Diego whenever I had a free weekend. Because Google Maps made it seem like a clear, virtually stress-free drive I opted to drive my car down twice. My initial thought was I would be able to maneuver around the city much better if I had my own car and did not have to rely on others to take me around. After making that drive a couple of times and comparing the initial projected drive time of 6 hours to the actual time of about 8 hours, along with the fact that parking is a challenge and I usually spend time with residents that have cars, I’ve found that it’s in my better interest to fly down the next time I travel. The bottom line for me is that I never gained anything driving down, except for sitting in Los Angeles traffic, but flying and thereby getting to spend more time with my friends is of value to me.

Taking account of the scarcity of time also sheds light on the decision to recycle. We are often told that recycling saves resources. That’s sometimes true. But one of the resources usually left out of the analysis is the value of time for the people who are recycling. In Pacific Grove, California, where I live, we are required to put yard waste in one bin, recyclable materials in another, and garbage in another. That requires extra time both to separate items and to haul three bins, rather than one, to the curb every week. Taking account of our scarce time shows that, although at first it may sound counterintuitive, recycling often (not always) wastes resources.

Many of us forget that scarcity, and the resulting necessity to make tradeoffs, apply not only to individuals and businesses, but also to government. If the government decides to spend more on war, it will have less to spend on health care or on something else. If it decides to spend more on war and not cut spending on anything else, then it will increase the budget deficit or reduce the budget surplus. Again, nothing is free.

Because there are tradeoffs in government as well, a very good question to ask a politician who wants the government to spend more on a particular program is: “What do you want the government to spend less on?” Few questioners of politicians ever ask that question. But one who did was PBS newsman Jim Lehrer—on September 26, 2008, during the first presidential debate between Democratic candidate Barack Obama and Republican candidate John McCain.

Both candidates had agreed, just a few days earlier, to vote for some version of the Troubled Asset Relief Program (TARP), under which the U.S. government would be given the power to spend up to $700 billion buying “troubled” or “toxic” assets—that is, assets that had a low value relative to their face value. At the time, the U.S. government was running a large budget deficit—the deficit for the just-ended 2008 fiscal year was about to come in at what seemed then like a high number: $458.6 billion. The Gross Domestic Product for fiscal year 2008 was $14,394 billion,1 making the deficit 3.2 percent of GDP. So it was natural for a questioner to ask how either candidate would pay for this much larger number for just one program.

And that’s what Jim Lehrer asked:

And what—and the first answer is to you, Senator Obama. As president, as a result of whatever financial rescue plan comes about and the billion, $700 billion, whatever it is it’s going to cost, what are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?2

The candidates could have replied that $700 billion was way too high an estimate of the cost of the program because many of those assets the federal government bought would be resold. In fact, that is what happened.

But both Obama and McCain seemed to take as given that the cost of the program would be very high. And, given that, their answers were illuminating.

Obama went first, and after admitting that “there are a range of things that are probably going to have to be delayed” and that “there’s no doubt that we’re not going to be able to do everything that I think needs to be done,” gave no specifics. Indeed, he devoted the remainder of his answer to naming programs that he would not cut.

Then McCain took his turn and did name some specifics: eliminating ethanol subsidies and doing away with cost-plus contracts in defense. Like Obama, McCain seemed to accept the $700 billion as a net cost estimate. Although he did somewhat better than Obama, actually naming specific cuts and not retreating to listing the things he wouldn’t cut, McCain’s proposed cuts were at least an order of magnitude too low.

By contrast, there was a U.S. President earlier in the 20th century who did a much better job of recognizing tradeoffs. Indeed, the speech in which he did so is famous, probably in part because it is so rare to see a president, especially one who made his reputation fighting World War II, recognize the tradeoffs involved in spending more on the military. In a speech early in his first term in office, President Dwight D. Eisenhower stated:

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.3

Imagine that I come up to you on the street and you don’t know me. I offer to buy you a free lunch. How do you respond? You probably ask, “What’s the catch?” That is, you want to know what I expect in return because there usually is a catch. That brings us to the second meaning of TANSTAAFL: When someone offers you something for free, he or she usually expects something in return.

When I was growing up, my mother would sometimes say, “Never look a gift horse in the mouth.” That is, when someone offers you something for free, accept it without questioning.4

But this second meaning of the expression TANSTAAFL suggests that my mother got one word crucially wrong. Instead of saying, “Never look a gift horse in the mouth,” she should have taught me “Always look a gift horse in the mouth.” That is, when someone offers you a free horse, a free lunch, or a free anything, always ask, “What’s the catch?” Of course, in some rare cases, there may be no catch. But keep in mind that while in the vast majority of cases, there will be a catch, that catch may sometimes cost you less than you value the item being offered. In short, you may decide to accept the horse or the lunch, but it’s always good to question the details up front.

Coda

There are two meanings of the expression, “There Ain’t No Such Thing as a Free Lunch.” The first, which is always true, is that there is scarcity, and scarcity necessitates tradeoffs. The second, which is almost always true, is that when someone offers you something “for free,” he expects something in return. Both are important meanings of the expression. And both are highly relevant to understanding economics and human behavior.

Why the horse’s mouth? Because, apparently, a quick way to estimate a horse’s health is to check its teeth.

*David R. Henderson is a research fellow with Stanford University’s Hoover Institution and an associate professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California.

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